Nikkei hits new 16-yr low on broad-based sell-off, loses 2.9% to close at 11,819

TOKYO, March 13 (Reuters) - Tokyo's key Nikkei average extended recent losses to end at a fresh 16-year low on Tuesday, battered by a plunge on Wall Street, global high-tech profit warnings and political uncertainty at home.

Tokyo's losses were broad-based, with high-tech shares such as chip maker NEC Corp and traditional financial issues including Sumitomo Bank Ltd giving up major ground.

``We are in one of those periods when all hell is breaking loose,'' said Takashi Yamazaki, chief investment officer at Tokio Marine Asset Management, citing growing sings of an economic slowdown, a wave of downward earnings revisions, a potential political vacuum and prolonged tumble in the U.S. Nasdaq market.

The benchmark Nikkei average shed 351.67 points or 2.89 percent to 11,819.70, its lowest close since January 28, 1985, when it finished at 11,798.86.

Answers

TOKYO (March 13, 2001 7:22 a.m. EST) - With its stock market plunging
to 16-year lows, talk
of deflationary dangers and a morass of confusion in its political
leadership, Japan appears to
be headed toward a serious economic crisis.

Surprisingly, a sense of crisis is hard to find among the public here.
Most Japanese don't own
stocks. Lower prices are seen by many as good news in a notoriously
expensive nation. And
back-room bickering over who might replace this country's lame-duck
prime minister is
viewed as no more than another Kabuki play.

But many indicators are ominous for the world's second-largest
economy. The finance
minister Tuesday acknowledged what has been the latest fear for
economists here: deflation.

"The economy itself is certainly in a state of deflation. There is no
hiding that fact," Kiichi
Miyazawa said.

If left unchecked, deflation is extremely damaging by setting off a
downward spiral that is
difficult to stop: The fall in prices leads to declining profits,
which in turn sets off shrinking
income and spending that further drag down the economy.

For months, the central bank played down the possibility of deflation,
saying that falling prices,
which have continued for about a year and a half, show the market is
finally opening up to
competition. Speculation has been growing that the Bank of Japan may
change that outlook
soon.

Although the economy may manage the government target growth of 1.2
percent for the fiscal
year ending this month, prospects are far more precarious for the
months ahead as
companies rein in spending and the U.S. economic slowdown devastates
Japanese exports.

Tokyo share prices reached a new 16-year-low Tuesday. The benchmark
225-issue Nikkei
Stock Average lost 2.89 percent to finish at its lowest close since
January 1985. On Monday,
the average had shed 3.75 percent.

But while many Japanese are worried, the public's haze of angst hasn't
turned panicky. Japan
has so far averted many of the harsher costs of economic
deterioration, such as massive
layoffs. Unemployment, although at a record high, is at 4.9 percent,
not much higher than the
U.S. jobless rate of 4.2 percent.

"As a consumer, it's good prices have come down," said Yu Suzuki, a
22-year-old student.
"And we have the feeling that we'll manage, that things won't get so
bad we can't eat."

Most Japanese shrug off the stock market slide as affecting only the
rich. Mutual funds aren't
as common here as in the United States. Only one in 14 Japanese owns
stocks, according to
the Japan Institute for Securities Information and Public Relations,
which compiles information
from stock exchanges.

But deflation has been devastating for Japan's homeowners who bought
property about 10
years ago and have seen its value nose-dive, in some cases, by about a
third of the price they
paid.

Japan's downturn has its Asian neighbors nervous as well.

"We can't be too optimistic," said Tsai Hung-ming, secretary-general
of Taiwan's Federation
of Industries, noting a weak Japan paints a bleak outlook for the
entire region.

In South Korea, Yonhap news agency said in an editorial: "Our economy
is closely linked with
those of the United States and Japan. We fear that the storms from the
two countries may
deal a heavy blow to our entire economy."

The experts acknowledge deflation is difficult to pinpoint. Falling
prices don't necessarily signal
the negative social costs of deflation, they say, and could be a plus
for consumers.

Where the experts agree is that deflation becomes critical if not
answered with proper policy.
But coherent political vision is precisely what is missing in Japan.

Most Japanese are disgusted by the wheeling and dealing - rather than
open policy debates -
that determine important decisions, such as who will succeed the
deeply unpopular prime
minister, Yoshiro Mori. Mori reportedly told party leaders he would
step down, but then denied
doing so. While high party officials want him out, there has been no
clear indication of when
he would go.

On Tuesday, Mori said the ruling party will move up the date for its
leadership elections, a step
that most likely would hasten his departure from office. But he did
not specify a date for the
vote.

During nearly a year in office, he has done little to revive the
economy.

"What's needed is to define the correct path to get out of deflation.
But you need strong
political leadership for that," said Takehiro Sato, an economist at
Morgan Stanley in Tokyo.